Tuesday, September 30, 2008

It's not the stupid economy, newspapers

“The biggest thing we need right now is an improved economy, because at least 60% of the revenue problem we’re facing today is a good, old-fashioned economic recession,” says William Dean Singleton.

We should be so lucky. But we’re not.

The chief executive of the MediaNews Group was on the money when he told PaidContent.Org that an economic revival would be mighty welcome. But even the most robust recovery wouldn’t solve a fundamental industry problem – shrinking classified ad sales – that has been festering for years.

If Dean were right and a weak economy were the primary reason for anemic newspaper revenues, then ad sales would be sagging more or less equally across all media, wouldn’t they? But that is hardly the case.

While the revenues of the 100 largest media companies grew by an average of 5.5% in 2007, sales fell an average of 5.2% at the 25 companies on the list that generated some or all of their sales from newspapers, according to data just published by Advertising Age. (For details, click to enlarge the table below.)

In other words, the performance of newspaper-related companies last year was almost 180 degrees at variance with the whole of the media industry.

Newspaper ad sales didn’t just go the wrong way in 2007. They have been declining steadily since 2001, when the economy suffered the twin shocks of 9/11 and the tech collapse. Even after the economy rebounded in 2003, newspaper sales consistently trailed the growth of the gross domestic product, as detailed here. Newspaper sales actually began falling in the second quarter of 2006 – even though the expansion continued for more than a year – and the rate of decline has accelerated ever since (chart here).

The chief problem is in the classified advertising business that historically generated 40% of newspaper sales and more than 40% of their profits. Between 2000 and 2007, classified sales fell $5.4 billion, or 27.7% from where they stood at yearend 2000. Recruitment revenues in the period fell $4.9 billion, or 56.3%, to the lowest level in 13 years. Automotive classifieds slid $1.8 billion, or 35%, to the lowest level in 22 years.

Real estate sales were the only major category showing consistent gains after 2000, but they plunged sharply in 2007, dropping $1.2 billion, or 22.6%, in a single year. Reasonable men and women may differ as to whether, when and how the realty market will recover now that the federal government has decided to help (or not).

Though today’s economy is perhaps the toughest in a generation, the industry’s problem began in the early days of the decade, when classified advertisers began forsaking high-priced print in favor of cheaper, highly targeted interactive media ranging from Craig’s List to Dice to AutoTrader and Zillow.

Car dealers, for example, put only 26.7% of their ad dollars into newspaper advertising in 2007, as compared with 52.0% in 1997, according to an annual survey conducted by the National Association of Automobile Dealers. At the same time, the trade association reports, Internet advertising rose from a sum too negligible to report in 1997 to 16.6% of the average dealer ad budget in 2007.

While the jury may be out on the future of real estate advertising, there is no doubt that newspapers have lost their grip on at least two of the three key classified categories they used to own.

It will take more than a trillion-dollar economic elixir from Uncle Sam to turn this around.


Anonymous Anonymous said...

It looks to me that an awful lot of the story of the future of newspapers is riding on the expectation that the usual jump in Q4 revenues increases will bring these companies through a miserable year. But if you look at the general economy and the credit crunch problems, I'm not expecting any Christmas season advertising jump at all. A lot of these overleveraged companies are already under severe strain, with the Strib now in default, and MNI renegotiating the terms of its loans just in time. We are now within weeks of seeing the end of what economic historians are certain to conclude was the most disastrously dumb series of management decisions in history.

6:20 AM  
Blogger tom said...

You missed the most intriguing thing I saw in that piece: that each lost dollar of print revenue needs only about 30 cents online to replace it. With online ads selling at 10 cents on the dollar vs. print, the disparity of 1 to 10 vs. 3 to 10 is not quite so scary.

9:48 AM  
Anonymous Anonymous said...

Dean Singleton's message is certainly welcome news if for no other reason that perhaps he'll reverse his scorched earth style of managing his properties. When will he be able to recapture the 60percent of ad revenue attributable to the economy -- Christmas perhaps?

10:02 AM  
Anonymous Anonymous said...

As noted in a comment above, the difference is in overall profit. With online being more profitable, fewer online revenue is needed. This also means lower overall revenue/cash-flow that maintains the legacy operations. Cost cutting seen currently is positiong newspaper companies to exist in the lower revenue/cash-flow environment while trying to maintain operating profit. The math works, only if there is enough time to execute.

1:38 PM  
Anonymous Anonymous said...

I can't believe Singleton said that. I had to read that quote twice in the story because I thought he was smarter than that. I'm looking at the same business trends from the inside and the best case I can make is that the economy contributes no more than 25% to our current woes. (That factors out the four-year "bubble" anomaly in real estate from 2002-2006. Real Estate declines will level out at some point, but it will never rebound.) As for the online vs print revenue comparison, it is irrelevant unless you can lower the "cost of sales" across the board. The cost of running presses, newsprint, designing ads and delivering a paper by car is not sustainable. But if we eliminate the legacy expenses, we lose the legacy dollars and suddenly, voila, you've lost your competitive edge in the market. That, in my feeble opinion, is the crux of the matter.

9:01 AM  
Blogger heyalchang said...

Given that we're a good decade into this, does any newspaper have an online strategy that remotely works?

Something structural, not "we'll write more trustworthy high quality stories".

If not, doesn't that say something about the nature of the business?

2:46 AM  

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